Wednesday, October 02, 2013 - Genie Out of the Bottle

Genie Out of the Bottle

by Sinclair Noe

DOW – 58 = 15,133
SPX – 1 = 1693
NAS – 2 = 3815
10 YR YLD - .02 = 2.63%
OIL + 1.76 = 103.80
GOLD + 28.80 = 1317.30
SILV + .57 = 21.83

So, the heads of the biggest banks, including Lloyd Blankfein of Goldman Sachs and Jamie Dimon of JPMorgan and Brian Moynihan of Bank of America, and a list of others (apparently Dick Fuld from Lehman Brothers couldn't afford the bus fare); so all these big banksters went to the White House today to discuss the shutdown. Heaven help us all. The President is getting advice on the economy from the very people who crashed the economy a few years ago. And then later in the afternoon the president met with lawmakers, not to negotiate but just to meet with the people that created the shutdown. Can everybody, please, just step away from the crack pipe? Maybe the politicians should try meeting with people that didn't cause the problems.

The meeting with the banksters, set up by the Financial Services Forum, a Washington-based trade group representing CEOs of the largest Wall Street banks, was part of an effort by the administration to leverage the business community’s clout in breaking the stalemate. Administration officials said pressure from the business community was effective in past fiscal fights. In other words, the financial industry threatened to take away the campaign contributions if the politicians persist in driving the economy off a cliff.

The impending debt ceiling was more of a concern for the banksters than the government shutdown. This assessment does absolutely not mean that the shutdown is no big deal. It’s a very big deal, it will harm people who need help from public employees and won’t get it. It will make government less efficient even before and after the shutdown, as now resources will flow to managing this and future potential shutdowns rather than focusing on the core business of government. It affects many more than just federal employees, but also contractors, and all the businesses that cater to the federal employees and the contractors. The initial hit on GDP will likely be small, but the longer it lasts, the bigger the hit. 

There will be a hit to lower income people. The Special Supplemental Nutrition Program for Women, Infants and Children (WIC) will not issue new payments to states, meaning that any state that has already spent all its federal food assistance money will be without recourse; meaning there are a lot of families that are going to be scrambling to put food on the table and a lot of families that won't put food on the table.

Congress didn’t just miss the deadline on Monday night to pass a continuing resolution that would keep the government open. It also missed the deadline to reauthorize the Temporary Assistance for Needy Families (TANF) program, formerly known as welfare.

The TANF block grant that the federal government gives to states to share the cost of welfare programs was scheduled for reauthorization in 2010, but rather than reauthorizing it then Congress instead extended it multiple times. The most recent extension was part of a continuing resolution passed in March that funded the government through the end of September 2013, so it expired Monday night along with all other government funding.

That means that as of yesterday, states stopped receiving the funds from the block grant. This shouldn’t impact beneficiaries, at least in theory. Benefits are typically paid on the first of the month. So, if the shutdown ends soon, not a big problem. If the shutdown drags out, big problem, and it won't just be a big problem for poor people.

By the way, in case you missed it, the reason for the shutdown is no longer a valid point of discussion. We got to the shutdown because of Republican demands that the Obamacare law be defunded or delayed, but that cat is out of the bag, the toothpaste is out of the tube, the genie is out of the bottle. In the past two days millions of people have signed up for Obamacare and if you want to undo those contracts..., well you can't. And even if the Democrats agreed to a delay in the individual mandate, you've still got millions of contracts.

Volume at HealthCare.gov continues to be high, with 4.7 million unique visits in the first 24 hours, and the call center receiving more than 190,000 calls and more than 104,000 Web chats requested. It's estimated that 7 million people will sign up for health care during the enrollment period. Who knows? Maybe more. The Republicans have failed to kill the law. Even if Republicans gain control of the Senate next year, President Obama will veto legislation intended to destroy his signature policy.

The soonest Republicans could damage Obamacare would be 2017, and that is assuming the new president is a Republican. By that point, most of the kinks in implementation will be worked out and Americans will have become accustomed to Obamacare. Parents will appreciate the fact that their young adult children, married or single, are eligible to remain on their parent’s insurance until they are 26. People with pre-existing conditions will be glad they don’t have to worry about being denied health care. Those who become seriously ill will be relieved to know that their insurance company can’t drop them now.

Poor families will want to keep the insurance they now receive thanks to the subsidies provided under the law. And they will be grateful that Medicaid eligibility was expanded to people with incomes up to 133 percent of the poverty line. Of course, that assumes their state goes along with that expansion. Most states have agreed to do so.

So, you kind of have to wonder what the reason is behind continuing the shutdown.

The banksters visiting the White House today are more concerned with the upcoming debt ceiling than the shutdown. The problem with the debt ceiling is that it could crash, well everything; we just don't know. Or as Blankfein said: “There’s precedent for a government shutdown; there’s no precedent for default. We really haven’t seen this before and I’m not anxious to be part of the process to witness this.”

What happens to US Treasury bonds? What happens to the dollar? What happens to the banks that hold treasuries and dollars? We just don't know. The closer we get to a default, the more panicky the markets will get. There are lots of ways investors can try to take advantage of market chaos, using options and buying inverse indexes, for example; or many people will just step to the sidelines; but there’s one sure-fire way to make money when things get hairy: speed. No one likes government-orchestrated chaos like high-frequency traders do.

While speed traders can make money in any number of ways, trading any number of assets, they thrive off of two things in particular: trading volume and market volatility. They like it when markets are deep and choppy, when there are lots of people trading, and when prices move around a whole bunch. In other words, the high speed traders are drooling over the prospect of a panic.

In August 2011, as congressional Republicans and Democrats took their fight over the debt ceiling to the brink, the markets went into pure freak-out mode. On 16 of the 23 trading days in August that year, the Dow Jones industrial average moved by at least 100 points—including a week where the Dow moved at least 400 points for a record four consecutive days. Daily trading volumes spiked from around 7 million shares to 18 million shares during the second week of August. And while volumes calmed back down, the market chop lasted all the way into November. August 2011 was the most profitable month for high-frequency traders since the financial crisis spun out of control in September 2008.

In the past week, the price of credit default swaps on treasuries has spiked; this is one way to buy protection against US Treasuries; though prices are still nowhere near where they were heading into the debt-ceiling crisis two years ago.

We've been following the story of the JPMorgan big settlement deal, and there is an important new development. You remember that last week we heard news that JPMorgan CEO Jamie Dimon had met with Attorney General Eric Holder. We know they talked about a possible settlement to resolve investigations into JPMorgan's crisis-era peddling of mortgage backed toxic waste. We don't know details of the meeting but Dimon exited with cufflinks, not handcuffs. It looks like there might be a settlement to the tune of $11 billion, but actually, it would be $7 billion in cash and $4 billion in other ways, like offering homeowners short sales instead of foreclosures; they get to count that toward their fine. There are still issues of liability to be determined.

We've talked about how Jamie Dimon was granted extraordinary access to the attorney general, the kind of access that basically nobody else gets. Now, here's the latest development. If there is a settlement, JPMorgan could reap a massive tax deduction from the settlement that would cost the U.S. Treasury $3.85 billion. More than half of the cash settlement could be written off, and JPMorgan could actually collect that amount in tax subsidies.

Congress and federal regulators face a choice that is made clear by JPMorgan's newest run-in with the law: they can close the tax loophole that allows corporations to deduct their settlement payments from their taxes, or they can continue allowing corporations like JPMorgan to walk away from settlement negotiations with billions in tax windfalls in their pockets; a reward for bad behavior. 

Monday, June 11, 2012 - The Non-Bailout Spanish Bank Bailout - by Sinclair Noe

DOW – 142 = 12,411 

SPX – 16 = 1308
NAS – 48 = 2809
10 YR YLD -.04 = 1.60%
OIL – 1.50 = 81.20
GOLD + 1.40 = 1597.10
SILV + .05 = 28.58
PLAT + 13.00 = 1450.00

So, here's the headline from the Murdoch Street Journal: “US Stocks Tumble as Spain Bank Bailout Optimism Fades”. And my question is how many phones did they have to hack before they found someone who was optimistic about the Spanish Bank Bailout?

Over the weekend, Spain requested a bailout of up to 100 billion euros ($125 billion) in loans from the European Union to assist its banks. Statements about the deal left several open questions, including the exact amount of aid the country will need and how the funds will be distributed. What exactly is there to be optimistic about? Oh, the Euro did not explode over the weekend – that's a relief but not a reason to be a big time buyer of equities.

It's not like the Spanish Bank Bailout makes anything better, except for the specific Spanish Banks being Bailed-Out. Europe still has a nasty circle of slow or no growth and increasing debt burdens. Greece's first bailout in 2010 sparked a healthy 1.3 percent rally in the S&P 500 stock index on the following day, but subsequent rescues fostered more muted responses.

The reaction after Spain's bank bailout has been the most downbeat of the lot. The four prior bailouts – for Greece and Ireland in 2010, Portugal in 2011 and Greece again in 2012 -- showed the euro's rallies fade within a month, while stocks were mixed, based on various factors.

In the credit default swaps market, where investors take out insurance against the risk of sovereign default, the pattern has been similar. The cost of buying insurance against Greek, Irish or Portuguese default tended to drop after the first two weeks as investors took the bailout news as a sign of relief, only to rise back to pre-bailout levels or higher within a month. After initially falling, the cost of insuring $10 million of Spanish government debt against default rose to 595 basis points, or $595,000 per year for five years. That is just off a record high.

For the Spanish economy as a whole, there has been no debt relief. This is what happened to Ireland. The banks are in healthier shape today, but the country is still in real trouble. In fact, a report by Spain's central bank showed Spanish banks were the main buyers of Spanish sovereign debt last year, essentially making the government dependent on the banks it is now trying to help. The Spanish government bails out Spanish banks, and Spanish banks bail out the Spanish government. And the longer this insanity persists the more likely people are to realize that the entire solution is a big game played on a closed course.

Bloomberg reports Wall Street bankers and traders, given hope by a market rebound in the first quarter, are now seeing earnings and paychecks threatened by turmoil in Greece. Yep it's all about the bankers and their profits and their bonuses. People in Spain have lost their homes, they have lost their jobs, and so clearly the concern here is the paychecks of Wall Street bankers. The government and the banks have forgotten why we have an economy in the first place; we do not have an economy to serve the banks and the government, which are morphing into one and the same. The reason for a bailout is not to make the banks whole. We've seen this game before. It is losing its effectiveness because we can all see through the scam.

Wait just one minute; just a week ago, Spain was saying they didn't want a bailout, they didn't need a bailout. What's going on here? Well, technically it is not a bailout, it is a line of credit to Spanish Banks. What's in a name? A rose by any other name would smell as sweet.

So, maybe the better question is whether the bailout that isn't a bailout will work. And the answer is probably not. Spain's access to capital markets and its cost of debt is not being addressed. The last auction of Spanish government bonds saw yield around 6.50% with the bulk of bonds being purchased by local banks. Spain and its banks also face pressure on their own ratings, which are now perilously close to becoming non-investment grade. The bailout may actually adversely affect the ability of Spain and its banks to funds. Commercial lenders are now subordinated to official lenders. Based on the precedent of Greece, this increases the risk significantly, discouraging investment.

The amount – 100 billion euro or more depending on the independent assessment of the needs of Spanish banks- may not be enough. The capital requirements of Spanish banks may turn out to much higher – as much as 200-300 billion euro. And since the money is going to rebuild the banks instead of rebuilding the economy, you will have banks that won't make loans to people who don't have jobs, and the nasty downward circle continues to swirl. The bailout will be provided with no conditions, which creates its own problems. The lack of conditions may lead to Greece, Ireland and Portugal seeking relaxation of the terms of their assistance packages.

The relief in Rome was short-lived. Italian bonds rallied early but within hours, Italian borrowing costs were creeping back up again, reflecting persistent market fears that the Continent’s third-largest economy could be the next to falter. Contagion into Italy and other countries is a reality. There seems to be little Italy can do to protect itself. Technocratic Prime Minister Mario Monti, appointed last November to succeed Silvio Berlusconi, has tried to shore up finances, overhaul the pension system, and implement regulatory reforms. The country is on track to bring its budget deficit within 3 percent of GDP this year. Italian banks are relatively healthy, and unemployment is less than half the 24 percent in Spain. Spain’s fundamentals are much worse than Italy’s.

Italy’s situation is hardly rosy. Its debt burden—120 percent of GDP—is the highest of any European country except Greece. Its economy slid into recession during the fourth quarter of 2011 and is expected to contract 1.7 percent this year. Monti’s reform agenda is stalling, unemployment at 10.2 percent is the highest in a decade, and consumer confidence is the lowest in 15 years. Italy is positioned to be the next lightning rod in the euro area. For now, yields on Italian debt are at 5.84 percent, less than they were when Monti took over last year.

Apparently the idea of the non-bailout, no pre-conditions Spanish Bank Bailout was that it would appear as if Spain itself is not paying for the bailout. In other words, it was a gamble by the Spanish government to avoid a general government bailout. The gamble failed; the Spanish government will now own this bailout and they will soon be stuck with the same kind of conditions imposed on the Greeks, and this will continue until it ends badly.

So much for a firewall.

The Federal Reserve has release a new study that shows the average American family lost 38.8 percent of its wealth from 2007 to 2010, with the biggest losses concentrated among households with the most assets tied to their homes. Fed economists conduct the surveys every three years to produce a snapshot of household balance sheets, pensions, income, and demographics that’s more detailed than broader reports about the economy. The surveys allow comparisons over time, with a consistent methodology since 1989.

Median net worth declined to $77,300 in 2010, an 18-year low, from $126,400 in 2007, the central bank said in its Survey of Consumer Finances. Mean net worth fell 14.7 percent to a nine-year low of $498,800 from $584,600. Just a reminder, the “mean” is the average while the “median” is more like the midway point.

The impact has been a massive destruction of wealth all across the board and especially for the broader middle class, or what once was the middle class. The decreases in median net worth appear to have been driven most strongly by a broad collapse in house prices.

The housing slump and financial crisis also boosted the dependence on wages as a percentile of net worth for the wealthiest 10 percent. The top 10 percent by wealth got 55.8 percent of their pre-tax family income from wages in 2010, up from 46.2 percent in 2007, the survey found. The portion earned from capital gains plunged to 2.3 percent from 14.4 percent. Once upon a time it was a widely held belief that the wealthiest would be able to pull the economy out of a downturn, but the uber-wealthy are a small proportion of the overall population and they can only account for a tiny fraction of the consumer spending you might expect from hundreds of millions of consumers who have been forced to tighten their belts.

Debt as a share of family assets rose to 16.4 percent from 14.8 percent as asset values declined. For those households with debt in 2010, the median value of debt was unchanged from 2007, while the share of families having debt fell to about 75 percent from 77 percent. Debt payments more than 60 days overdue were reported by 10.8 percent of families in 2010, up from 7.1 percent in the prior survey. Measures of debt payments relative to income might have been expected to increase. In fact, total payments relative to total income increased only slightly, and the median of payments relative to income among families with debt fell after having risen between 2004 and 2007. The share of families with high payments relative to their incomes also fell after rising substantially between 2001 and 2007. If there is any one thing that makes sense during these difficult economic times, it is to cut or eliminate debt.

Fed policy makers meet next week to consider whether the central bank needs to add to its record stimulus after employment grew at the slowest pace in a year in May.

The Fed has already cut its key interest rate almost to zero and injected hundreds of billions to bailout banks and purchased a few trillion in debt to lower long-term borrowing costs. Even so, the jobless rate has stayed above 8 percent since February 2009, compared with the central bank’s long-range goal of 4.9 percent to 6 percent. Why? Because the actions taken by the Fed were more consistent with saving the banking and financial sector than with fulfilling its mandate of maximum employment. I don't know if it is impossible for the Fed to bring down unemployment with monetary policy alone, only that their policy has not done the job even though it has benefited the banksters, you know, just like what's happening right now over in Europe.